Law firms are increasingly concerned that the current slowdown in M&A activity will damage their profitability, reveals new research by Thomson Reuters Legal business, the world’s leading source of intelligent information for businesses and professionals.
According to the ninth annual research survey by Thomson Reuters Legal business, nearly a quarter (24%) of the Finance Directors (FDs) of the UK’s Top 100 law firms fear that weakness in M&A work is now a major risk to profitability, up from 8% last year.
The survey results reflect a trend seen elsewhere by Thomson Reuters. Global M&A activity was 18% lower in the first quarter of 2016 than in the same period the prior year*.
Headwinds caused by Brexit may now further dent business confidence already hit by the continued oil price slump and on-going concerns over the slowing economy in China.
The UK IPO market has also seen a slowdown in activity, with the number of IPOs on the London Stock Exchange falling from 137 in 2014 to 92 in 2015, according to PwC**.
Thomson Reuters points out that a decline in M&A activity is particularly significant for law firm revenues as this work tends to feed instructions in other areas such as employment, competition and tax.
“The buoyancy in M&A transaction volumes last year was a key driver of profitability for law firms, but further growth was in question even before the Brexit vote and will be even more so now,” says Samantha Steer, Director, Large Law Segment for Thomson Reuters UK&I Legal business.
“M&A transactions are a vital source of work for law firms, both in themselves and because they generate a significant amount of workflow across a range of other practice areas. If fears that corporate finance activity is weakening are realised that could rattle the sector.”
Law firm FDs predict that technology will be one of the fastest-growing sectors in 2016, with 28% of respondents foreseeing a rapid growth in work from this sector.
“The technology industry in particular has seen massive investment in recent years which has propelled growth in the UK and we expect this trend to continue into the long-term.
“London-based fintech start-ups have seen high levels of private equity investment flooding in which has helped to stimulate corporate activity whilst also cementing the city’s position as a leading fintech hub,” says Steer.
A sharp jump in demand for regulatory and compliance work is also expected this year, with 48% anticipating fast growth – compared to 28% last year and 18% in 2010.
Top 100 FDs predict that the mining sector will be among the sectors seeing contraction in 2016.
“The slump in commodity prices caused by a glut in world supply of metals and a slowdown in China has created an environment where 80% of FDs expect work from the mining sector to stagnate or contract in 2016 – the highest proportion of any area of work,” says Steer.
The prolonged low oil price has caused some Top 100 FDs to predict a shrinkage in energy work this year with 12% forecasting a contraction in workflow – up from 4% last year.
The study found that downward pressure on fees remains the biggest threat to the profitability of law firms, as it has since the recession, with around three quarters (72%) seeing this as high risk – up from 60% in 2010.
Cost over-runs on fixed fee work is the next biggest concern, with 40% citing this as a high risk
to profitability.
“Although firms have become much better at pricing their quotes for work on a fixed fee, finance departments are still wary about potential cost over-runs,” said Samantha Steer.
However, concerns about late payments by clients has receded markedly since the recession as law firms get tougher about chasing payments. Now, only 12% of FDs rate this as a high risk to profitability, down from 27% in 2010.
The survey, entitled Threats to Profitability and Opportunities for Growth: A Survey Amongst the UK’s Top 100 Law Firms, is carried out annually by Thomson Reuters to determine issues facing the industry and to provide valuable insight into law firms’ outlooks and strategies. Research is conducted amongst Finance Directors at 25 of the UK’s Top 100 law firms including Magic Circle and Silver Circle firms.
* Thomson Reuters Mergers & Acquisitions Review First Quarter 2016
**PwC IPO Watch
(Source: Thomson Reuters)
